Controversial “Offshore Outsourcing” Term a Misnomer for Complex Array of Global Sourcing Strategies: TowerGroup

TowerGroup Research Finds US Financial Institutions Sold $200 Billion to International Markets, Offsetting $1.3 Billion in IT Spending Going Offshore

NEEDHAM, MA, July 12, 2004 � Amid continued political and popular resistance against offshore outsourcing, new research from TowerGroup asserts that the term itself is a reductive misnomer for a far more complex array of global sourcing strategies.

Beyond fears of the US bleeding jobs overseas is a landscape of diverse insourcing and outsourcing initiatives that net out to benefit the US economy.

“TowerGroup estimates that in 2003, US financial services institutions imported $1 billion in software application development from offshore locations, with another $0.3 billion in IT services,” said Virginia Garcia, senior analyst in the Financial Services Strategies & IT Investments practice and author of the research. “However, all of these offshore sourcing revenues are offset considerably by US financial services exports of roughly $200 billon sold annually to international markets. Moreover, TowerGroup estimates that global sourcing resulted in $1.2 billion in operational efficiencies last year, with an additional $0.4 billion in capital freed for innovation.”

Garcia added that a healthy portion of that money went to US vendors and will fund the much-needed innovation to drive international business. “In the end, it pays to join the ‘global village,'” she said.

Highlights of the research include:

  • Global companies do business globally. Many multinational firms that source globally have been doing so for decades. It makes no sense economically or logistically for them to do otherwise.

  • While “captive” sites for IT and business processes owned by financial institutions may be located offshore, they often don’t qualify as true “outsourcing.” Captive sites represent internal operational spending and there might be better called “offshore insourcing.”

  • There is no such thing as 100% offshore outsourcing. Any sourcing project or contract will necessarily involve onshore and offshore leverage resources on both the client and vendor side. Indeed, many companies tagged as “offshore outsourcing” vendors actually have large and growing operations in the US – creating thousands of job stateside and reducing operational risk to clients.

  • Approaches to global sourcing are increasingly diverse. Today’s top financial services firms are managing global sourcing portfolios that include typical offshore vendor outsourcing, captive site insourcing, outsourcing to US firms with global delivery capabilities, and outsourcing to firms with US delivery models. (See chart.)

“Process transformation and efficiency are the new frontier of global sourcing, building on the cost savings nirvana once sought,” said Garcia. “In sourcing smartly, financial institutions will cherry-pick those processes and locations that best meet their goals, including best practices, strategic transformation, IT and process governance, strategic cost management, and risk management. Providers with global delivery capabilities, financial services domain expertise and platforms specific to financial services will be well-positioned to service these clients.”

TowerGroup’s research report, “Baptism By Fire for Global Sourcing: It’s Time to Relinquish the ‘Offshore Outsourcing’ Moniker!” is available for purchase by contacting TowerGroup at +1.781.292.5200 or [email protected]

About TowerGroup: TowerGroup is the leading research and consulting firm focused on the global financial services industry. A respected source for trusted information and advice, TowerGroup brings many of the world�s largest financial services, technology and professional services firms a deeper understanding of the business and technology issues impacting their organizations. Headquartered near Boston in Needham, Massachusetts, and with offices in New York, London, and Kuala Lumpur, TowerGroup serves a global client base. Visit TowerGroup online at www.towergroup.com.